Why is one of modern retail’s biggest players heading for bankruptcy? How are Reliance and Amazon related?
Why is one of modern retail’s biggest players heading for bankruptcy? How are Reliance and Amazon related?
The story so far: Once considered a formidable force in modern retail, Future Group faces a bleak future as two of its largest group companies, Future Retail Ltd. and Future Enterprises Ltd., are heading for bankruptcy under the IBC (Insolvency and Bankruptcy Code) after defaulting on payments to creditors, according to people familiar with the development.
Why has Reliance Retail pulled out of the £24,713bn deal that would have allowed it to take over Future’s retail operations?
Secured creditors of Future Group last week rejected a proposal for a major transaction between Future Group companies and the retail arm of Reliance Industries Ltd. citing the legal challenges for the proposed transaction and the lack of clarity about the prospects for the transaction. There is no specific proposal for creditors to vote on, a spokesman said on condition of anonymity.
According to an announcement made in August 2020, Reliance companies were set to acquire Future Group retail and warehousing assets for £24,713 million. As part of the deal, Reliance would invest an additional 2,800 crore in Future Enterprises for a 13% stake. After Reliance called off the deal, which failed to go ahead after Future’s secured creditors rejected the proposal, Future Group is now left with few options to start a new life.
The stage appears to be set for the lenders to collect the approximately 29,000 crore owed to them through the bankruptcy proceedings before the National Company Law Tribunal (NCLT).
Will all of Future’s assets be available as inventory when the bankruptcy proceedings begin?
While it will take around six to eight months for creditors to file for bankruptcy to collect their debts, with or without “haircuts,” Future Group’s big businesses — mainly food and grocery — will suffer the most as their stores prepare for the closure or head takeover . Under the deal, now scrapped, Reliance was set to acquire assets from 19 Future Group companies.
As of February 2022, Reliance is said to have acquired about 950 stores once operated by the Future group companies. Reliance Retail has reportedly claimed that the acquisition of these stores was separate from the 24,713 crore deal, which has now fallen through.
Reliance Industries Limited (RIL) is said to have invested almost 4,000 crore in running Future’s stores and supplying products in recent months after the big retail conglomerate ran out of money. These stores operated as Future Group branded stores even after Reliance began serving their operational needs.
How did Reliance gain control of so many Future Group businesses?
Amid the legal battle between Amazon.com Inc. and Future Group, the landlords of a large number of stores had reportedly approached Reliance to transfer the leases into their (Reliance) name because Future was unable to pay the rents. According to people familiar with the matter, the Reliance arm took over the business from February 25, 2022. The Future Group itself believes that it was a “hostile takeover by Reliance to sell the assets by failing to pay the agreed amount acquire”.
What is likely to happen to the remaining Future Group stores?
As of now, the Future Group has around 550 stores, including small-format stores. Because financially strapped Future Group is unlikely to be able to pay lease rents to landlords, most stores are either close to closure or could be acquired by either Reliance or another competitor through leases with landlords. According to people familiar with the development, most of Future’s retail stores are facing closure within a month due to lack of financial resources and supplies.
In 2019, Future Group had an employee base of 75,000 employees, which has now fallen to fewer than 13,000. The noisy legal battle between Amazon and Future Group has also impacted visitor numbers.
What role does Amazon play in this confusion?
Future had offered Amazon a 49 percent stake in Future Coupons, a Promoter group company. Through this December 2019 transaction, Amazon also acquired an indirect stake in Future Retail.
As losses mounted, Future Group closed the £24,713 billion deal with Reliance Retail in August 2020. In October 2020, Amazon filed a lawsuit challenging the transaction, alleging that the proposed transaction with Reliance violated certain clauses in Amazon’s contract with Future Group and also seeking international arbitration. Amazon claimed that as per its agreement with Future Coupons, Future Group absolutely needed written approval from the US online giant for any deal with Reliance. In the ongoing legal battle, the Future Group won a brief reprieve last December when the Indian Competition Commission suspended the Amazon Future Agreement, citing false allegations by Amazon.
However, when Future brought the NCLT to the NCLT for approval of the proposal with Reliance, secured creditors opposed the transaction, although shareholders and unsecured creditors had given their approval. Today, visitor numbers in the few remaining functioning Future Group stores have fallen sharply.
THE ESSENTIALS
Two major Future Group companies, Future Retail Ltd. and Future Enterprises Ltd., are preparing for bankruptcy under the IBC (Insolvency and Bankruptcy Code) following defaults on creditors.
Reliance’s businesses were set to acquire Future Group’s retail and storage assets for £24.713 billion in August 2020. However, secured creditors of Future Group rejected this proposal, citing legal challenges and ambiguities.
The Amazon lawsuit was a major blow to a cash-strapped Future Group. Reliance, which already owns some of his businesses, should be their buyout.
